UK Guaranteed Minimum Pensions: There is No Such Thing as Easy Cash
Following a change in UK legislation there is now uncertainty about if, and how, Guaranteed Minimum Pensions (GMPs) can be commuted for cash before GMP age (65 for males and 60 for females). Some pension plan advisers are suspending trivial commutations pending trustee instructions and we are increasingly being contacted by clients for advice on what they should do.
In brief, this issue has arisen because Regulation 25 of the Occupational Pension Schemes (Schemes that were Contracted-out) (No 2) Regulations 2015 (Regulation 25) introduced on 6 April 2016 is worded slightly differently to the previous legislation (which is Regulation 60 of the Occupational Pension Schemes (Contracting-out) Regulations 1996, in case you are wondering).
It was previously clear that the GMP had to be notionally revalued to GMP age for the purposes of deciding whether a member’s benefits were within HMRC’s trivial commutation limits. Provided the benefits were within the trivial commutation limits, the pension plan’s rules would determine the actual lump sum payable (usually only applying revaluation up to the date of benefit crystallisation and then using the pension plan’s commutation factors).
It is now unclear whether Regulation 25 requires the notionally revalued GMP to be the amount paid to the member. This would create an inflated trivial commutation value; the benefit would need to be valued as if the GMP and all revaluation to GMP age were payable “immediately”, so the younger the member, the more material this over-inflation.
Industry bodies have tried to seek clarity on Regulation 25 from the DWP. The DWP’s response is that in drafting Regulation 25 they did not intend to change the policy intent of the provision. The Government is intending to consult in respect of other aspects of Regulation 25. However, it is not clear whether this issue will be included in the consultation. There are also no timescales for the Government’s proposed consultation.
Trustees are therefore in a difficult position, not knowing whether to permit trivial commutation of GMP prior to GMP age, and if so, how to do this.
Do they suspend commutations prior to GMP age and risk upsetting the membership, particularly given that there is no clarity as to how long the position may remain unclear?
Do they adopt the interpretation that is most generous to members, but risk the payments being unauthorised if this interpretation proves to be wrong?
Do they maintain the past approach and take the risk that a Court may decide that this approach no longer complies with the legislation?
Until we have further clarity on this issue, there is no correct answer. Trustees will need to understand the risks and then select the option that they are most comfortable with.